21 September 2009

Risking

Usually, the law punishes only those whose breaches of duty actually cause a harm. But, are there times when a mere risk of harm is or should be actionable?

The negligent infliction of emotional distress tort sanctions "zone of danger" near misses that distress people, arguably because they were put at risk even though they weren't harmed.

Like many philosophy papers, the paper itself combining moral theory and epistemology, is almost unreadable for want of specific examples and connections to reality to motivate the discussion. But, the question asked is a good one.

The really exciting applications of this question are not in conventional physical tort, crime and political law, with bullets whizzing by your head that you may or may not know about, involuntary Russian Roulette, and would be dissidents cowed by a risk of being persecuted, although the undisclosed product defect example mentioned comes closer. The question is also central to "human subjects committee" issues in medical and other academic research.

Far more interesting, in my view, are the examples where someone has been involuntarily put at financial risk that are so common in the current financial crisis. For example, should someone be able to sue because a landlord entered into a lease when the landlord knew that the mortgage was likely to default and prematurely evict the tenant?

Should it be legally wrong to buy a house with a mortgage you area unlikely to be able to pay, if you know up front that this is unlikely, if you make no affirmative misrepresentations by doing so. Does your intent matter? How unlikely would it have to be for you to perform for it to be a problem? 51%? 67%? 75%? 99%?

Does the owner of a business with many employees have a moral obligation not to take business risks that could put those employees all out of work without their consent?

Should an issuer of a credit default swap (basically a third party guarantee of a bond or debt) have an affirmative obligation to disclose that the issuer has so many commitments to so many parties that there is no way that the issuer could fulfill them all if the economy goes bad? Essentially, this is what regulatory agencies require of FDIC insured banks and insurance companies.

In Colorado, there are examples of attorneys being disbarred for borrowing money from a client trust account, thereby putting client funds at risk, even though the funds were all paid back before the client knew what had happened.

Even more interesting, because it does not involve property rights, is the criminal offense of theft in the form of accepting payment for a contract that you never intended to perform (another kind of conduct that attorney regulation authorities sanction thorough the back door of trust account and other attorney ethical rules). Is accepting payment on a contract that one is unlikely to be able to perform ethically questionable because it puts the other party to the contract at inappropriate counterparty risk?

Courts have repeatedly described forming an entity that one anticipates will be unable to pay its obligations as a ground for disregarding the corporate veil, but very rarely actually resort to this ground. In real life, disregard for corporate formalities or transfers of property without receiving fair value in exchange when one is insolvent are much more likely to cause entity form to be disregarded.